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Multiple instruments to change energy behaviour: The emperor’s new clothes?

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Abstract

Over the last few decades, several instruments have evolved to deal with similar energy and environmental challenges. For instance, the economic literature prescribes separate tax or cap-and-trade systems to internalize negative environmental externalities and subsidies to internalize positive externalities such as research and development. However, policy is not straightforward because of the influence on cost and competition and concerns for regional employment, economic activity within certain industries and any distributional effects. Tax discrimination, subsidies and regulations then undermine the efficiency of energy instruments. To balance any environmental concerns, other instruments, including green and white certificates, have been created. While innovative, these work as simple combinations of taxes and subsidies. While the extant literature thoroughly analyzes the partial effects of these instruments, there has been little focus on their basics and the effects of aggregate taxes and subsidies. This complexity calls for research on the efficiency of each instrument, including the administration and transaction costs associated with holding a large set of instruments. We should consider the coordination and simplification of policy tools before complicating the system further by introducing new, primarily equivalent, instruments.

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Notes

  1. See also Wilson (1980), Parry et al. (1999), Weale (1992), Ballard and Fullerton (1992), Ballard and Medena (1993), Bovenberg and de Mooij (1994), Bovenberg and Goulder (2002), Felder and Schleiniger (2002), Goodstein (2003) and Aidt and Dutta (2004).

  2. Some of the literature highlights the differences between these instruments. See, for example, Bovenberg and de Mooij (1994). We do not go into these details here. Rather, we start out with the equality presumption as our focus is on other aspects of the implementation of these instruments.

  3. See also Goulder and Schneider (1999), Goulder and Mathai (2000), Jaffe et al. (2002) and Golombek and Hoel (2005).

  4. See also Jensen and Rasmussen (2000), Bertoldi et al. (2006), Böhringer and Lange (2005a,b) and Hasselknippe (2006).

  5. See Goulder (1995a,b), on taxes and subsidies, Amundsen and Mortensen (2001), Bye (2003) and Menanteau et al. (2003) on green certificates, Bertoldi et al. (2006) and Quiron (2006) on white certificates and Böhringer and Lange (2005a,b), Hoel (1998), Hoel and Karp (2001) and Jensen and Rasmussen (2000) on brown certificates.

  6. Note that for the ease of illustration, the figures imply constant derivatives; that is, elasticities vary along the curves. When we discuss differences in elasticities among consumers or producers and the total market, constant elasticities are more realistic.

  7. The demand elasticity e measures by how many per cent demand changes when the price increases by 1%; \(\varepsilon = {\left( {{\delta x} \mathord{\left/ {\vphantom {{\delta x} x}} \right. \kern-\nulldelimiterspace} x} \right)}{\left( {{\delta p} \mathord{\left/ {\vphantom {{\delta p} p}} \right. \kern-\nulldelimiterspace} p} \right)}\). The more elastic demand is, the higher is the elasticity. The total market elasticity is a weighed average of the individual elasticities. Hence, if the market share of an individual with relatively low elasticity decreases due to taxation, the average market elasticity increases.

  8. See footnote 2.

  9. New and expanding enterprises

  10. Different kinds of renewable energy sources are classified as green; see COM (2000), Voogt et al. (2000), Voogt et al. (2006), Amundsen et al. (2001) and Jensen and Skytte (2002). Brekke and Bye (2003) discussed whether we can characterize any energy source as green. In European countries that have introduced a green certificate system, the definition and scope of the technologies differ tremendously.

  11. Both the supply of energy and the supply of energy-saving appliances face increasing marginal costs. This implies both a shift (adding cost) and a twist (adding a marginal increasing cost) in the supply curve.

  12. An alternative picture could shift total demand parallel inwards so that the new demand equalised supply in x 1.

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Authors and Affiliations

  1. Economics, Energy and the Environment, Statistics Norway, Oslo, Norway

    Torstein Bye

  2. Research, Statistics Norway, P. O. Box 8131 Dep., 0033, Oslo, Norway

    Annegrete Bruvoll

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Bye, T., Bruvoll, A. Multiple instruments to change energy behaviour: The emperor’s new clothes?. Energy Efficiency 1, 373–386 (2008). https://doi.org/10.1007/s12053-008-9023-9

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